Thursday, August 26, 2010

The Postal Service's sole-source contracts with associates of former executive Robert F. Bernstock had the tacit approval of Postmaster General Jack Potter, according to documents published last night.

"Potter stated he was aware of Bernstock bringing in outside contractors to the Postal Service 'almost from the start because he needed to get an infusion of new thinking and talent as quickly as possible,'" says an investigators' report of a Feb. 4 interview with Potter. "Bernstock informed Potter 'he was considering using people he was aware of as consultants, who he personally knew.'"

The report and related documents from the USPS Office of Inspector General were made public last night by The Washington Times as part of its ongoing investigation into Bernstock's brief and controversial stint as head of marketing for USPS. The Times article published last night focuses on discrepancies among the accounts given by Potter and other key officials regarding Bernstock's outside work.

"Potter advised Bernstock 'the bottom line was to follow the Postal Service procurement rules, have lawyers review the contracts, and do not circumvent the Postal Service rules and regulations,'" the OIG report said.

"Regarding whether Bernstock hired friends as contractors, Potter thinks the term 'friends' is too strong of a word. He said, "'Of course Bernstock is going to go back to his pool of resources, like former colleagues, people he worked with and thought had good skill sets.'

"Potter said it is normal for 'some people to trail each other their whole career.' He believes Bernstock reached out to people with the skills he needed and does not have a problem with Bernstock hiring former colleagues."

Potter also said some of the contracts were turning out to be excellent deals for the Postal Service because it would have cost far more to use either USPS employees or traditional contractors like McKinsey to accomplish the tasks.

Tuesday, August 24, 2010

The “Son of Black Liquor” tax credits will probably cost American taxpayers hundreds of millions, if not billions, of additional dollars, but Congress might grab the money without paper manufacturers getting a dime.

Seven publicly traded paper companies have estimated that they will net about $570 million from the IRS’ recent ruling that made black liquor eligible for Cellulosic Biofuel Producer credits (CBPC), reports the Press-Register of Mobile, Alabama. Leading the way are Weyerhaeuser with $240 million (pre-tax) and Domtar with $200 million.

Meanwhile, the IRS’ “generosity” toward companies that produce, and burn, black liquor as part of their pulp-making operations has caught the eye of Congress, writes Jeremiah Coder for Tax Analysts. “The agency’s administrative largesse appears to be prompting members of Congress to consider legislation to retroactively disallow biofuel credits for black liquor claims.”

Sen. Charles Grassley of Iowa, the ranking Republican of Iowa, has asked the Joint Committee on Taxation for a “revenue estimate” on such a move, Coder reports. That is significant in at least three ways:

1) JCT’s estimate of revenue (actually, avoided costs) from overturning the IRS ruling is “likely to immediately become an attractive add-on to any legislation in need of pay-fors,” Coder writes. In other words, Congress could use the savings to pay for a new program and claim that it is not increasing the federal deficit (though it would be, because no money has been budgeted to subsidize the use of black liquor).

3) To back up its calculation, the JCT may reveal how much was paid out to paper companies from the original black liquor tax credit program. The 21 publicly traded companies reported receiving $6.5 billion from that program, but some big pulp makers like Georgia Pacific are privately held and therefore do not have to real what they received.

The JCT will also need to take a stab at some questions that are bedeviling the pulp makers about how to interpret the IRS ruling. Here’s a look at recent statements from some of the companies about those questions and how Son of Black Liquor might affect them:

Weyerhaeuser (CFO Patricia Bedient): “During the first part of 2009, we produced approximately 238 million gallons of black liquor, which did not qualify for the alternative fuel mixture credit. This equals $240 million of potential cellulosic biofuel credit at $1.01 per gallon, or $149 million net of tax. Since this credit offsets income tax liability, we could only carry the credit forward. It is still unclear whether the credit can be claimed in the same year as the alternative fuel mixture credit [the original black liquor tax credit]. For the last three quarters of 2009, we claimed $344 million of fuel mixture credit. There's a great deal of uncertainty as to the process for claiming these credits and we are evaluating both credits to determine which credit or mix of credits, if allowed, would add the most value to the company.”

Domtar: "From January 1, 2009 until we started to claim the Alternative Fuel Tax Credits, we have approximately 200 million gallons of black liquor that may qualify for this CBPC that would represent approximately $200 million of CBPC or approximately $120 million of after tax benefit to the Corporation. In July 2010, we submitted an application with the IRS to be registered for the CBPC. There is, however, a degree of uncertainty related to this credit as we have not received our registration for the credit and we believe there is some lack of clarity with the application of the IRS rules. As such, during the period ended June 30, 2010, we have not recorded any impact related to the CBPC."

Graphic Packaging Corp. (CFO Dan Blount): “It appears that some in the industry are considering the cellulosic biofuel credit path. We have evaluated this approach. And given our large NOL [net operating loss] position and the fact that the cellulosic biofuel credit can only be used to offset federal income taxes payable, we will not be pursuing this option.”

Kapstone Paper & Packaging: "In December 2009, the Company filed its registration as a cellulosic biofuel producer for the year 2009 and is awaiting approval. ..The IRS is expected to provide guidance for converting AFTC’s to cellulosic credits for qualifying producers. … At this time, the Company estimates a $22 million potential future after-tax credit for CBTC relating to black liquor burned in 2009 prior to the Company’s AFTC registrations being approved. If the Company were to receive any tax credits related to cellulosic biofuel it would be realized by reducing income tax payable beginning in late 2010."

Packaging Corp. of America: "As a result of the IRS guidance, PCA has filed an application to receive the required registration code to claim the cellulosic biofuel producer credit. We expect this registration to be received during the third quarter. PCA has not yet filed a claim for any black liquor credits earned in 2009, since our tax -- 2009 tax return is not due until September 15, 2010. Once the cellulosic biofuel registration is received, PCA can claim the cellulosic biofuel producer credit of $1.01 per gallon instead of the alternative fuel mixture credit of $0.50 per gallon. This would increase our total 2008 and 2009 tax credits to about $370 million or $230 million after-tax, compared to alternative fuel mixture credits of $195 million or a $45 million increase."

There's an interesting on-line discussion of Son of Black Liquor taking place at The Paper Planet. And for other recent examples of Congress using alleged "savings" regarding pulp byproducts to "pay for" new programs, see:

Friday, August 13, 2010

Now maybe we know what the head of the Postal Regulatory Commission means when she says the U.S. Postal Service has not pursued all of its possible business opportunities under current law.

What some view as the Postal Service’s ball and chain – the obligation to deliver to every address – could become a competitive advantage for a variety of businesses if mobile sensors were mounted on letter carriers’ trucks, according to Michael J. Ravnitzky, chief counsel to PRC chair Ruth Goldway.

“Mobile sensors mounted on postal trucks could collect and aggregate a variety of important data as a byproduct of postal delivery, taking advantage of efficiencies of scope and scale. The data collected might include, among others, air pollution levels, weather data, sensing of chemical and biological agents, and areas of weak cell phone service,” says a paper Ravnitzky recently presented.

They go everywhere
“Postal delivery trucks that go everywhere nearly every day offer a unique platform, and a valuable opportunity, to fulfill important additional national objectives. As postal trucks travel the neighborhoods of America (and other nations), they could also collect data important to the country’s safety, security, well-being and economic progress.”

Using existing technology, Ravnitzky writes, such sensors could also map potholes, sniff out methamphetamine labs and marijuana farms, read utility meters, scan license plates to identify stolen cars, take “street view” photos, and disperse “pheromones to disrupt and confuse the insect courtship and mating processes” of gypsy moths, mosquitoes, and other pests.” (Speaking of pest control, I know of some letter carriers who’d want a spray that keeps postal supervisors off their backs.)

The slide show accompanying Ravnitzky’s paper says the presentation represents his views and not those of his employer. But the paper was posted on the PRC’s Web site this week. And a previous Ravnitzky paper on electric delivery vehicles (See The United States Postal Service & Power Company?) grew out of a Goldway article and seemed to influence her statements on the subject.

Wednesday, August 11, 2010

The U.S. Postal Service proved this week what mailers have been saying for weeks -- that it is seeking exigent rate increases without first having done everything it can to reduce costs.

Specifically, it demonstrated that it still has excess career employees – many of whom are eligible for retirement – yet is doing nothing to reduce those numbers. Before the Postal Service is granted rate increases that require bending, if not breaking, the law that governs postal rates, postal executives need to explain why they are discouraging employees from retiring when they should be encouraging early retirement.

The Postal Service provided the first piece of evidence against itself on Monday when it answered the Postal Regulatory Commission’s query, “Please provide the percentage of [flats] pieces currently processed in a non-optimal fashion by manual sort.” The Postal Service’s answer: “30 percent of volume was handled manually in FY 2009.”

A surplus of equipment, a dearth of automation
The Postal Service has enough equipment – in fact, a surplus of equipment -- to avoid virtually all manual handling of flats. Mailers have been claiming for years, without refutation from the Postal Service, that the only reason for so much manual handling is to keep “automation refugees” (excess employees) busy. Imagine a farmer who kept a combine idle while having his workers harvest with machetes, or a construction company turning off its backhoe so its employees can move some dirt with shovels.

What is the Postal Service doing to reduce its excess employment levels? Nothing. Stephen J. Masse, vice president of finance and planning, told the PRC today that the Postal Service has no plans to offer early-retirement incentives and is waiting for attrition to reduce its employment levels.

In fact, the Postal Service is doing worse than nothing. Its practices discourage retirement by providing many employees with estimates of retirement benefits that are too low. Dead Tree Edition explained the problem in The Postal Service's Early-Retirement Snafu and PostalReporter documented the situation in more detail a year ago. But the Postal Service seems to have done nothing to correct the problem.

Some have told me that federal bureaucrats and regulations tie the Postal Service’s hands in this matter. If that’s true, why aren’t postal officials raising a stink with Congress? And why aren’t they communicating better with employees about the issue rather than leaving that to the unions.

It makes you wonder whether the people at L’Enfant Plaza who provide estimates of retirement benefits are the same ones who allowed the government to overcharge the Postal Service $75 billion in pension costs.

USPS officials are rightly arguing that the federal government should return those pension overpayments to the USPS. Their case would be stronger if they committed to putting some of that money aside for early-retirement incentives that would help reduce the Postal Service's workforce, which constitute 80% of its costs.

It could even get creative -- for example, letting employees in an overstaffed facility bid to retire early, with the lowest bids winning. Some employees might be more willing to retire from career positions if they could switch to part-time or on-call status without their pension benefits being harmed.

Previous articles in the “tough questions for the Postal Service” series:

Tuesday, August 10, 2010

Have you ever wondered how Dead Tree Edition got its name, where D. Eadward Tree lives, or how much of a social-media moron he really is?

If so, check out the great interview with Mr. Tree (Chief Arborist of Dead Tree Edition) that print-industry blogger Deborah Corn posted today at PrintMediaCentr.

She actually got him to explain in just a few sentences what the whole black-liquor controversy is about, and she prompted him to answer the provocative question, "USPS -- Friend or Foe?". Mr. Tree also provides some advice for would-be bloggers.

Saturday, August 7, 2010

Quad/Graphics’ announcement of five plant closings this week provided reminders that its success has relied mostly on innovation and huge printing plants -- but not on acquisitions.

Quad bought one of the five plants, in Reno, NV, barely four years ago, fulfilling the company’s years-long dream to have a West Coast presence. It tried to "Quadracize" Reno by replacing most of the equipment with newer presses and binding lines moved from other Quad plants, but then seemed to struggle selling business into Reno.

With the Quad purchase, the plant lost a major source of business – doing bindery and offset-press work for the Reno rotogravure plant owned by Quad’s rival, R.R. Donnelley. Reno is too far from Quad’s co-mail operation in Wisconsin to produce catalogs and monthly magazines efficiently and too small to develop its own co-mail pool.

Although the plant is close to California, customers with time-sensitive products were nervous about serving that huge market from Reno because of frequent highway closings in the infamous Donner Pass. Quad can now serve that business from the former Worldcolor plant in Merced, CA, and has also picked up Worldcolor’s rotogravure plant in Fernley, Nevada, leaving no place for the little Reno operation.

Hurt by a Quad invention
The announced shutdown of the Corinth, Mississippi plant, however, results partly from Quad’s success as an innovator. For years, that plant seemed impervious to the ups and downs of the printing business because its key customer was National Geographic; no other rotogravure operation was configured to meet the magazine’s exacting demands.

Then Quad developed its patented triple-former folders, which gives a roto press the flexibility of an offset press, such as the ability to produce gatefolds and signatures with small page counts. The printing of National Geographic moved in 2002 to Quad’s Martinsburg, West Virginia plant, where the presses were specially designed to produce the magazine.

The Thursday announcement included the shutdown of two plants -- in Clarksville (not Covington, as I originally wrote -- thanks, "Anonymous"), Tennessee and Lebanon, Ohio -- that, like Corinth, Quad acquired last month in its merger with Worldcolor. Quad also announced it would accelerate the closing of the Dyersburg, Tennessee plant that Worldcolor had already started.

One publishing executive noted that his company had become accustomed to the closure of printing plants in Tennessee. Work that it did in the now-closed Covington plant was shifted to Dyersburg last year and then a few months ago to Clarksville.

Another publishing executive noted that the operations being closed do not fit the Quad profile of an ideal printing plant.

“Quad/Graphics likes plants that are a minimum of one million square feet and can be expanded,” he said. Until the Worldcolor deal, Quad had built those mega-plants from scratch in stages, usually with heavy helpings of Quad-invented technology.

The five closed plants, the executive noted, average barely half a million square feet “and are either not expandable, are in overlapping geographic areas or in regions that don’t support the current business level.”

Monday, August 2, 2010

Sometimes, it seems, the Postal Service bends over backwards to ensure that periodicals are mailed inefficiently so that it can bellow about how unprofitable they are.

The latest example is the proposed exigent rate increases, which once again would fall more heavily on efficient Periodicals-class mailers than on inefficient ones. Before they get approval for extra-special exigent rate increases for the Periodicals class, postal officials should explain why they keep forcing publishers to follow rules that drive up the Postal Service’s costs.

Periodicals regulations, for example, hinder dropshipping and force the use of sacks, both of which are lose-lose propositions that waste money for publishers and the Postal Service.

Time Inc. tried to get those rules eased in the groundbreaking 2006 postal rate case by proposing significant discounts for mail dropshipped to Bulk Mail Centers (now known as Network Distribution Centers). But the Postal Service resisted that change, claiming that Time’s proposed cost-based approach to Periodicals rates would be unfair to small publishers.

“One of the ironies of the rate case is that Time’s BMC proposal would have done relatively little for Time and other big publishers but would have been especially helpful to small-circulation publishers,” says Mark W. White of U.S. News & World Report, who testified in the rate case.

Periodicals rules mean that even the largest publishers and co-mail pools end up with mail that is sacked, instead of palletized, and with mail that cannot be dropshipped cost effectively. The problem is magnified for small, nationally distributed publications, especially those with little advertising content.

A convoluted solution
The Postal Service’s recently released Flats Strategy acknowledged that Periodicals rules hinder dropshipping and lead to a lot of sacked mail, which is expensive for the Postal Service to handle. But it proposed a convoluted solution: Allow Periodicals flats to be co-mailed or co-palletized with Standard flats (which are typically catalogs).

A recent experiment with mixed-class co-mail bombed because of limitations in the Postal Service’s information systems. And some publications, like daily newspapers, are not suited to mixed-class co-mail.

There’s a simpler solution: Change Periodicals rules to be more like those for Standard flats, which allow the creation of NDC pallets (nearly eliminating sacks) and provide meaningful discounts for dropshipping to NDCs. That would save publishers some money and the Postal Service a lot more.

The Postal Service could even allow “mixed-NDC pallets” and other changes that could eliminate Periodicals sacks for many publishers, White points out, “rather than the current rules that force publishers to create sacks that are expensive for printers, mailers, and the Postal Service.”

The Washington Monument Strategy
But perhaps postal executives don’t want the Periodicals class to be efficient. Periodicals might be the USPS’s Washington Monument.

In 1968, the U.S. Park Service responded to budget cuts by reducing visiting hours at the Washington Monument, then directing irate tourists to make their views known to their Congressional representatives, whose offices are located only a few blocks away. (Here’s a fuller account of the incident.) Ever since then, the “Washington Monument” strategy is the name for bureaucrats’ trick of trying to protect their budgets by proposing minor cuts in highly popular programs.

The Periodicals class represents only 3% of the Postal Service’s revenue but nevertheless is highly visible to the public and Congress. Through antiquated rules and questionable cost accounting (See, for example, For Periodicals, The Postal Service’s Math Doesn’t Add Up.), USPS has made Periodicals look like a highly unprofitable operation that’s ripe for huge price increases.

With the Postal Service trying to win support for cost-saving measures like five-day delivery, having a grip on the publishing industry’s, um, sensitive anatomical parts comes in handy.

In some ways, it’s hard to object to anything that might help bring about reform of the Postal Service’s “pre-funding of retiree health benefits” (which are actually interest-free, no-term loans to the federal government) and pension-fund overpayments.

A game of "chicken"
But a bureaucratic game of "chicken" – if indeed a concerted effort, rather than mere incompetence, causes Periodicals’ supposed lack of profitability – can be dangerous and counter-productive. More than ever, publishers are determining that a business model relying on the Postal Service for distribution is not viable in the long term.

At a time when mailers should be rallying around the Postal Service to push for real reforms in Congress, they have instead banded together in an unprecedented coalition to fight the service and its exigent rate increases. And with publishers likely to take a big hit from this proposal and others emanating from L’Enfant Plaza, groups like the Affordable Mail Alliance have no trouble getting press coverage.

The Park Service never faced that kind of organized anger from its customers.

Sunday, August 1, 2010

If postal executives want everyone to forget about the Robert F. Bernstock fiasco, they should tell the Internet search engines and their own webmasters.

Type the query "bernstock usps" into Google, Yahoo!, or Bing, and the first link that comes up is for a glowing biography of the disgraced postal official on the Postal Service's Web site. A search of "bernstock" on the Postal Service's own Web site has the biography among the first few links.

Bernstock left USPS in June after several questionable practices came to light, including issuing no-bid contracts to his cronies. But the Postal Service's Web site continued to list Bernstock as a top postal official until Dead Tree Edition pointed out the error. (See Bernstock Gone But Not, Um, Quite Gone and That Was Quick!.)

The online biography, which no longer seems to have a link from the Postal Service's main Web pages, says Bernstock "is responsible for all product management, product development, retail and commercial products and services and commercial sales. The division that he leads produces more than $70 billion in annual revenue, and has integrated roles in pricing, operational support, service enhancements, partnerships, and investment activities — all critical to the success of postal products."

The size of the recent run-up in coated paper prices seems to have surprised most industry participants and observers.

RISI, the paper industry's leading market analyst, will report in a few days that the July market price of 40# coated #5 paper in the U.S. was $805 per ton, an increase of $70 since March, Dead Tree Edition has learned. In a March online poll, only 21% of Dead Tree Edition readers predicted that the index would increase $65 or more by July.

Despite its reputation for having a bulish bias, even RISI's forecasts turned out to be too low. In March, it was predicting that the 3rd Quarter price for 40# would be only $765.

The other major analyst of U.S. paper-market pricing, Forestweb's The Reel Time Report, reports an even larger increase in coated paper prices since March -- more than $100 versus the $60-$70 range for RISI indices. That monthly report had warned about the possibility of sustained price increases this year, but it turned somewhat bearish in March after NewPage restarted two idle machines.

Slight recoveries in catalog mailings and publication advertising, along with the idling of a Kruger mill and rising prices for kraft pulp, have at least temporarily solved the capacity overhang that was driving prices down. Buyers trying to load up before the next price increase have helped to create an especially tight market during the usually busy summer season.

But inventory adjustments can't sustain a bull market for long. Before they get too confident, sellers of coated paper in the U.S. should find out how many of their catalog and magazine customers are spooked by the U.S. Postal Service's attempt to get "exigent" rate increases and are therefore redoubling efforts to shift more to digital media.

The Mainstream Media Cites Dead Tree Edition

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